To change a system or improve a process, you must understand how it works. And part of this requires understanding constraints, boundaries and capabilities. As Dirty Harry said (when discussing the importance of rigorous due diligence, I believe), “a man’s got to know his limitations.”
Prior to conducting due diligence for clients, I ask several questions before committing our team to a market study related to wood-using mills. Certain questions establish the working relationship and process for how information will be shared and communicated to the ultimate decision makers. Other questions dictate the playing field for identifying and ranking potential wood baskets for investment. These questions include:
- Specifically, what type of wood does the facility need to make this work? This means detailing the species and form (e.g. roundwood and/or chips). While the question seems obvious, we have had projects where raw material specifications get changed mid-stream, or a disagreement exists between the project manager and the engineers. While we live in the real world and understand things change, we also waste time and bake in risk if we fail to clarify starting assumptions and operable specifications. To do good work, we need the facts.
- How much wood does the plant or project require? Volume and size matter in the forest products industry. Each feasibility study in forestry must assess the availability, accessibility and sustainability of the wood raw materials on a local basis. The volume needs tell us where the project fits on our viability matrix for capital investments: is this a niche play or market shifting investment? This depends on understanding the wood type and volume, as well as the economics of the technology…
- What is the ability-to-pay for wood raw materials? The universe of forest industry products has a pecking order: some end markets and technologies are simply more profitable and flexible than others. By clarifying up front whether or not the proposed investment can compete for raw material under a basic understanding of forest industry economics, we can reduce unnecessary analyses and focus resources on the most promising and viable capital investments.
When comparing markets or wood baskets, the key remains estimating how local timber prices could change over time in one wood basket relative to other candidate baskets regardless of macroeconomic conditions. The analysis and the decisions for capitalizing mills and acquiring timberlands remind us to “know what is knowable” and confirm the limitations and constraints of the local market relative to our objectives. As such, these three questions help us confirm a common understanding of the starting assumptions and competitive requirements of the investment.
Forisk will discuss due diligence strategies and frameworks during “Timber Market Analysis” on June 19th in Atlanta, a one-day course that details how to track, analyze and rank timber markets and wood baskets. For more information, click here.